ACCA Applied Knowledge · Business and Technology · Governance in business organisations
In the context of corporate governance, which of the following correctly describes the agents and the principals in the agency relationship of a listed company?
Directors are the agents and shareholders are the principals. Shareholders own the company and delegate day-to-day management to directors, who are appointed to act on the owners' behalf and in their interests. This delegation of decision-making is what creates the agency relationship in a company.
- ADirectors are the agents and shareholders are the principalsCorrect
- BShareholders are the agents and directors are the principals
- CEmployees are the agents and directors are the principals
- DAuditors are the agents and directors are the principals
Explanation
Shareholders own the company and appoint directors to run it on their behalf, so directors act as agents and shareholders are the principals. The reverse in option B inverts the relationship, as shareholders do not act on behalf of directors.
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